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With money to invest, Kenyans say no thanks to banks

Across the continent, Africans are saving and investing more of their own money but you won’t find them at the bank. According to the UN Economic Commission for Africa (ECA) the region’s domestic savings rate rose from just 19 per cent of gross domestic product (GDP) in 1998–2001 to 26 per cent in 2007. Similarly, Africa’s domestic investment rate increased from 19.7 per cent to 22.1 per cent over the same period, according to the ECA’s 2008 Survey of Economic and Social Conditions in Africa. Domestic savings are especially important now, as Africa’s prospects for external funding look ever more uncertain at a time of global financial turmoil.

In Kenya and other countries however, it has been informal, community-based savings clubs which have helped many ordinary Kenyans channel their savings into productive investments. Currently, local investment clubs hold a total of about 35 bn Kenyan shillings, equivalent to US$469 mn, reports Patrick Kariuki, chairman of the Kenya Association of Investment Groups (KAIG). That is just a small portion of the KSh642 bn in total bank deposits in Kenya in 2007 but still more than twice all the foreign grants the country received that year.

Kenyans call such groups chamas, loosely translated as “committees.” They began as a means of survival during the economically troubled 1980s and 1990s. Relatives, neighbours or work colleagues would pool resources in a chama and use the money as a fund for borrowing and lending among members in times of difficulty. As the economy improved, members borrowed to start small businesses.

Over time, clubs started formalizing their relationships, with some registering as companies and investing in stocks and real estate. Today, according to Mr. Kariuki, one in every three adult Kenyans is a member of an investment club. “We believe that these clubs have a lot of potential. If the capital they have is properly harnessed, it would help our country immensely,” he told Africa Renewal.

Savings and credit co-ops

Group savings are not a new trend in Kenya. More formal domestic savings organizations have existed since the late 1970s. Over the years many farmers, teachers, doctors and other professionals have formed savings and credit organizations (SACCOs). Today, SACCOs and cooperatives are estimated to hold a total KSh130 bn ($1.7 bn) in savings.

Unlike investment clubs, which anyone can join, most SACCOs and cooperatives have restricted memberships, usually among people in a certain profession. The Mwalimu Cooperative, for example, caters to public school teachers. And while investment clubs are geared towards saving for investment, SACCOs and cooperatives, like pension funds, are legally restricted from pursuing business activities that could risk members’ funds.

The main obstacle to the viability of SACCOs and cooperatives as investment tools, says James Mwangi, the chief executive officer of Equity Bank Kenya, has been poor management. “The governance structure of cooperatives has been a big problem and more of a liability than a help,” he told Africa Renewal. “We have seen a lot of abuse of office and people losing their money.” The problem became so great that “it almost killed the saving culture,” Mr. Mwangi explained, prompting many people to hang on to their savings in cash.

Inspiring models

On the other hand, some well managed clubs have prospered. Alliance Capital Partners (ACP), for example, was formed to invest in real estate, after members realized they could achieve more by working together. Through ACP, they raised as much of their own capital as they could and then used that money to attract further bank financing. They have built a 49-room hotel and two residential apartment buildings with 17 tenants each, and are currently developing a third building with 80 apartments.

“What a club does is that it helps you pool resources,” Antony Mwaniki, a member of ACP, told Africa Renewal. “This opens up bigger investments to all the members. Suddenly a transaction which would be out of reach to an individual becomes possible to everyone in the group.”

Overall Mr. Kariuki notes, “Clubs typically have a 50 per cent success rate. Quite a number are doing well and have formed companies.” But most, he adds, have less than KSh1 mn in capital. Poor management is a major reason investment clubs fail, he explains.

Helping clubs overcome such problems was the motivation for establishing the KAIG, explains Mr. Kariuki. “We wanted to help clubs with information, like how to set up properly and the type of rules and policies that would help them achieve their goals. We also regularly host events where people come to speak to them about investment opportunities.”

The clubs are also beginning to encounter some of the same problems as commercial institutions, including, Mr. Mwaniki noted, “political risk.” Last year, his ACP group pitched a $1 mn investment proposal to a UK backer. “But that interest dried up immediately when the post-election violence broke out” after the presidential election. Africa’s governments, he says, “need to realize that political crises, even for short periods, drastically affect the way we can package our investment opportunities for the scrutiny of international markets.” In the meantime, he concluded, government can strengthen the clubs by providing a sound regulatory framework and reaching out to the Kenyan diaspora. “What is lacking is a good clearinghouse and the right information to enable them to invest back home.